In Defense of Swiss Banking

GENEVA - Leaders of the G-20 have now declared that "the era of banking secrecy is over," and have threatened to take action against "non-cooperative jurisdictions, including tax havens." No one should include Switzerland among these, for the Swiss government has already offered to improve international cooperation by adopting the OECD's standard on international administrative assistance on tax issues.

To appreciate the implications of this, it is important to know the background. Swiss banks are obliged by law to extend a very high degree of bank-client confidentiality to all their clients, both Swiss and foreign. Any banker who reveals details of his clients' affairs to unauthorized third parties is committing a criminal offense in Switzerland.

But this bank-client confidentiality has never been 100% absolute, and Swiss legislation makes absolutely clear what it protects and what it does not protect. It poses, for example, no obstacle whatsoever to a criminal investigation.

One characteristic of Swiss law is that it distinguishes between tax evasion and tax fraud. Submitting an incomplete tax return, for example, would be tax evasion and is handled through administrative measures, including severe fines if necessary.

So, despite some foreign media reports, tax evasion is not legal in Switzerland; it merely is not a criminal offence. Anyone found to be illegally evading their tax obligations in Switzerland faces severe financial penalties.

Tax fraud, on the other hand, involves forging documents and thus much more criminality. Tax fraud is a criminal offense in Switzerland.

The international implication is that Switzerland has traditionally offered international assistance in criminal tax cases that have elements of fraud, but not of evasion. By agreeing to adopt the standard on the exchange of information set out in Article 26 of the OECD's Model Tax Convention, Switzerland will now extend administrative assistance to cover all tax offenses, including tax evasion.

States that implemented Article 26 agree to exchange information upon request, but not to the automatic disclosure of information. This means that the country seeking information must produce a substantiated request, naming the taxable person and the specific bank in question or describing them in sufficient detail. So-called "fishing expeditions" - indiscriminate trawling through bank accounts - remain out of bounds.

The privacy of clients not under suspicion will thus continue to be protected by Swiss bank-client confidentiality. Citizens in a democracy would never allow their government to have an automatic right of forced entry into their homes on the off-chance of finding stolen goods, so why should the state have an automatic right of forced entry into bank accounts on the off-chance of finding a few tax evaders or criminals?

Once Switzerland makes a commitment to do something, it does it thoroughly, efficiently, and on time. The implementation of the agreement with the European Union on the taxation of savings is a good example of this.

I am confident that the same reliability will be demonstrated in Switzerland's commitment to take on the OECD standard, which will be incorporated into future bilateral double-taxation agreements. Following this commitment, improper criticism of Switzerland and its legal system, and also various threats to put Switzerland on a so-called "black list," should end.

But I have not quite finished with the OECD. The OECD is a multinational grouping of 30 countries established nearly a half-century ago, with Switzerland a member. It is not an international organization, and it has no legal authority to speak for the world or to establish rules, norms, or standards for any state except its own members - that China is not a member demonstrates clearly the limits of its reach. The OECD's founding convention calls on it to assist sound economic expansion and to contribute to growth in world trade on a multilateral, non-discriminatory basis.

Switzerland's recent treatment by the OECD, however, has been disgraceful. The secret drafting of a black list behind a member's back is unacceptable and, in my view, seriously damages the OECD's credibility.

Incidentally, I think it would be far more revealing to draw up a list of those states that have destroyed or damaged the relationship of trust with their citizens to such an extent that they can only secure their tax revenues by criminalizing tax evasion and trampling on privacy.

Accusations that Switzerland is a tax haven usually come from countries that have a low level of taxpayer honesty. The Swiss state, by contrast, has an excellent relationship with its taxpayers, and there is a correspondingly high level of taxpayer honesty. The Swiss people vote their own taxes, have a high degree of control over how tax revenues are spent, and believe their tax system to be fair, transparent, and comprehensible.

Critics should study the Swiss model with a view to improving things in their own countries. The OECD itself has drawn attention to Switzerland's Code of Conduct for Tax Authorities, Taxpayers and Tax Advisers as an example of how to promote what it calls an "enhanced relationship between taxpayers and revenue bodies."

Of the world's tax evaders, 99.99% do not have a bank account in Switzerland, but Switzerland is an easy target. There is no political risk involved; the Swiss have no powerful lobby in the United States or the EU that they can mobilize; as the birthplace of private banking, Switzerland has enormous symbolic value; as the world leader in private banking, it triggers jealousies.

In these difficult economic times, Switzerland serves as a handy scapegoat, enabling financially-challenged states to discharge their frustrations and divert their citizens' attention from shortcomings in their own complicated and inefficient tax systems. Attacks on Switzerland should be seen and analyzed from this perspective.

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